Negative real returns? Check. Extreme conservatism? Check. Lack of innovation? Check. Loosing investors money (on inflation adjusted basis) while getting paid handsomely with fat bonuses? Triple Check.
The above aptly describes our list of the laziest set of investors in Nigeria which we identify as the 21 Pension Fund Administrators (PFA) see full list here https://www.pencom.gov.ng/pfas.php licensed by the National Pension Commission (PenCom) to manage about N6 trillion of retirement assets.
The problem though is that a lack of competition, laziness and opaque nature of the Nigerian Pension Fund industry is foistering mediocre returns on contributors who are mostly handicapped and unable to do anything about the situation.
This means the prospects of about 7 million Nigerian workers (currently paying into the Contributory Pension Scheme) accumulating enough funds to retire comfortably is becoming a mirage due to the negative inflation adjusted returns that PFA’s currently earn.
Right now workers who are contributors to the Pension Funds are locked in and are unable to change PFAs irrespective of performance or expense ratio’s charged by such fund administrators.
So this means a lot of pension Contributors are actually paying these active managers for mediocre returns.
National Pension Commission (PenCom) Data shows that as at July 2016 Nigerian PFAs held (68.42%) of pension assets under Management (AUM) in FGN bonds and Treasury Bills, State Government Securities (2.37%),Corporate Debt Securities (5.03%), and local money markets securities 7.86%.
Thats a whooping 83.68% in some form of fixed income security or the other.
The rest is made up of equities 9.3%, Real estate 23.6% and foreign ordinary shares 2.02%.
The Rate of Return for Stanbic IBTCs Retirement Savings Account (RSA) Fund – one of the largest in the country – for 2015 was 8.52 percent, while the 3-year average return for the RSA as at 31 December 2015 was 9.94 percent, according to data from the company’s website.
For Aiico Pension Managers its three years rolling average Rate of returns on RSA Funds was 8.84 percent, ARM Pensions RSA fund delivered a 5.57 percent return in the half year period to June 2015 (its most recent data), Axa Mansard had 3 year rolling Average Rate of Returns for its RSA Fund at 8.26 percent.
Crusader Sterling Pensions with 259,000 RSA accounts had its RSA fund unit price at 3.0244 in January 2016, and 3.0139 in June representing a marginal fall in returns of -0.347 percent; while Leadway Pensions RSA fund has returned 5.12 percent this yearo June.
Nigerian average year on year inflation which came in at 8.4 percent and 8.2 percent in 2014 and 2015 respectively hit a high of 17.6 percent in August 2016.
For Pension Fund Contributors it is essential that PFAs earn inflation adjusted returns on their contributions for benefits due in some cases as long as decades from now, to maintain current standards of living when they retire.
The struggle to earn adequate returns highlights problems the Pension Industry is facing from a slumping stock market, soaring inflation, slowing growth and dearth of other asset classes.
Nigeria may record its first negative GDP print since 1991 this year as the slump in oil prices hit growth and company profits.
The country’s main stock index slumped 16.39 percent in 2014, 17.35 percent in 2015 and is down 2.12 percent this year.
The bourse recorded only six initial public offerings (IPOs) in 2014 and Zero in 2015.
More equity listings might help to diversify the banking and Dangote Cement skewed Nigerian stock index, helping to attract more PFA money.
Without a change in strategy however by PFAs the N5.8 trillion in Pension Assets which has already suffered a drop in dollar terms due to the recent devaluation of the naira may continue to be eroded by inflation.
Pencom, the industry regulator should also incentivize competition by publishing their monthly performances and expense ratios and allowing individuals to move their accounts to better performers and leave laggards.
Without reform of the sector we will continue to see business as usual with Nigerians being shortchanged at retirement.